As a company providing financial services such as bookkeeping or payroll to international companies operating in Israel, one of the important topics we deal with is transfer pricing. It is important to understand the term and strive to manage it properly in order to minimize the risk of conflicts with tax authorities or issues during due diligence.

So what is transfer pricing? In the business world, when there are transactions between two unrelated parties, the transactions are expected to occur at market prices. This is because both parties buy or sell willingly and independently.

The situation is different when transactions occur between related parties, such as parent and subsidiary companies, or sister companies within the same organization. For example, a development center in country A and a manufacturing center in country B.

In such cases, the parties responsible for the transaction, primarily the company managers, have a very high influence on how the transaction is conducted. They can influence the transaction price or the geographic location where it will take place, affecting the amount of taxes that should be paid to authorities.

Therefore, tax authorities are very interested in transactions between two related companies. The requirement is that the transaction price be similar to the price of a transaction conducted between unrelated parties.

To meet these requirements of tax authorities, transfer pricing work is required. Within the framework of transfer pricing work, the data of the developing transactions will be examined, and a market study will be conducted to determine the appropriate range for transaction prices between related parties that would match the market prices if the transaction were conducted between unrelated parties – that is, at real market prices.

With each passing year, the economy becomes more globalized and additional countries require market studies to determine the appropriate range for transaction prices between related parties. For more information, contact us.